Custom injection molder and mold and automation manufacturer MGS Mfg. Group Inc. (Germantown, WI) is just the latest plastics company to be acquired by investment firms looking for strong manufacturers in this industry (" MGS Mfg. Group acquired by private-equity firm Mason Wells "). It seems like there has been a trend of heavy mergers and acquisitions (M&A) activity in the plastics industry, and I wanted to know if my hunches were right. So, I called Bill Ridenour, President and CEO of Polymer Transaction Advisors Inc. (Wapiti, WY), a firm specializing in M&As in the plastics industry, and asked him what he sees. He agreed with my assessment that M&A activity among plastics processors has picked up over the past few years, noting that there are several reasons for this.

“There’s a desire on the part of larger companies to enter into new markets and obtain new customers, acquire new plants and locate in new geographies. There is also the attraction of acquiring new manufacturing technologies and press sizes,” Ridenour told PlasticsToday. “In strategically entering new markets, companies that serve the medical and personal-care products are especially in demand.”

Some acquiring companies seek to develop raw material synergies. “By consolidating plants, companies achieve an economy-of-scale advantage that leads to better raw material sourcing,” he said. “Smaller companies generally have to go to distributors and buy on the spot market, which means pricing is higher, whereas larger companies can place blanket orders for all the plants and get better pricing.”

The primary “new geographic” region that is driving M&A is Mexico, Ridenour explained. “Mexico is a specific ‘hot’ market right now with perceived interest in maquiladora cities such as Juarez and Tijuana, and even other cities deeper in Mexico, including Chihuahua and Monterrey, which are especially attractive right now.”Companies looking at Mexico are seeing the tremendous growth of the automotive industry, looking for injection molders in that region, making Mexico operations especially valuable, Ridenour explained. “It’s a timing reason currently and will likely go on for several years,” Ridenour stated. “We’ve seen a lot of new operations in Mexico. The Japanese are betting on automotive growth in Mexico.”

Ridenour pointed out that an important factor driving the M&A trend is all-time historic high M&A pricing, which is drawing potential sellers into the market. “Given that M&A prices have never been as high as they are now in the United States, pricing is a huge incentive to sell. I’m seeing this across the board in injection molding, compounding, masterbatches and sheet, rod and tube businesses,” he stated.

“Multiples of earnings/purchase price have never been higher. People are making fortunes in the stock market because there’s no place to invest except in the stock market—nothing else is paying any interest and [may even be] losing money,” Ridenour said. “Huge amounts of equity are available to private equity groups due to profit taking from the stock market, which is itself booming. Potential business sellers have an overwhelming financial incentive right now to enter the M&A market.”

Additionally, Ridenour explained that debt investment in

T-bills is so unattractive with the average T-bill rate slightly over 1.5% pre-tax, there is no incentive to buy debt. “Equity investment is the only available investment where an adequate return is possible,” he said. “Debt is cheaper than ever before, with interest rates on conventional financing often approaching 4%, even on mid-market sized $5 million to $50 million transactions.”Consequently, private equity firms are often oversubscribed in their newer M&A equity funds, i.e., they are forced to take on more equity from their investors than they actually want. “Often funds contain 25% or more equity than was originally sought,” said Ridenour. “The pressure to deploy this cash into acquisitions is intense, forcing acquisition prices up.”

With equity markets flush with cash, and money to finance acquisitions very cheap, Ridenour expects these companies to make further acquisitions to strengthen the business. “There are a lot of $5 million to $50 million companies out there to acquire.”

Ridenour said his company currently is working somewhat more on the “search” side than the “sell” side, where the majority of his transactions have historically been generated, as he has many buyers very interested in buying. “We’re being deluged by people wanting to buy plastics companies,” he noted. “Additionally, the Mexico manufacturing factor is huge, and we’re fielding a lot of phone calls about opportunities there.”